The Big Mac Effect Uncovering Undervaluation of Philippine Peso vs. Other Currencies

The Big Mac Effect Uncovering Undervaluation of Philippine Peso vs. Other Currencies

Why the Big Mac Index Matters

As we delve into the world of international economics, one indicator stands out as a valuable gauge of currency values – the Big Mac Index. This simple yet insightful tool compares the prices of McDonald's signature sandwiches across different countries to provide a glimpse into relative currency fluctuations. In this post, we'll explore why the Philippine peso is undervalued by 50% against the dollar, according to The Economist's latest update.

A Taste of Economics

First introduced by The Economist in 1986 as a lighthearted way to track currency fluctuations, the Big Mac Index has become a respected indicator of international economic trends. By comparing the prices of Big Macs worldwide, we can gain valuable insights into the relative value of different currencies. For instance, if a Big Mac costs $5.79 in the United States and P169 in the Philippines, it implies an exchange rate of P29.19 versus the greenback.

The Philippine Peso's Undervaluation A Cause for Concern

Fast-forward to January 2025, and we find that the Philippine peso remains undervalued by 50% against the dollar. This significant gap highlights the need for policymakers to address currency fluctuations and promote economic stability.

So, What Does it Mean?

The undervaluation of the Philippine peso suggests that the country's goods and services are cheaper than they should be compared to international standards. This could lead to

Increased exports Cheaper products can attract more buyers, boosting export revenues.
Inflation concerns Excessive imports may fuel inflation, as cheap foreign goods flood the market.
Trade imbalances The Philippines might struggle to maintain a balanced trade position.

What's Next?

To address these concerns, the Bangko Sentral ng Pilipinas (BSP), the country's central bank, should consider adjusting interest rates and implementing monetary policies to stabilize the peso. Additionally, policymakers must prioritize fiscal responsibility, ensuring that government spending is aligned with economic growth goals.

Conclusion

The Big Mac Index offers a fascinating glimpse into international currency dynamics. In the case of the Philippine peso, it highlights an undervaluation that demands attention from policymakers. By addressing this issue, the Philippines can promote sustainable economic growth, stabilize its currency, and improve its global competitiveness.

Keywords Big Mac Index, Philippine Peso, Currency Valuation, International Economics, Exchange Rates, Economic Stability

Edward Lance Arellano Lorilla

CEO / Co-Founder

Enjoy the little things in life. For one day, you may look back and realize they were the big things. Many of life's failures are people who did not realize how close they were to success when they gave up.